Chinese commodity demand still has 'legs to run'

To the surprise of many, 2016 has turned out to be a good year for commodity prices, recovering strongly from the lows seen earlier in the year.

It’s been such a dramatic turnaround, coming after years of sliding prices, that analysts at Macquarie Wealth Management dubbed the recovery as a “mini-renaissance” for the sector in a research note released earlier this week.

Much of it has been due to the actions of Chinese policymakers who, faced with slowing economic growth, rolled out a swathe of new infrastructure spending to help bolster economic activity.

Well, it’s not just global commodity suppliers that have benefited from this decision.

As this chart from the Commonwealth Bank shows, the percentage of loss-making industrial firms in China has also decreased significantly.

“China’s stimulus efforts have helped downstream industrial sectors more than upstream sectors,” says Vivek Dhar, a mining and commodities at the Commonwealth Bank.

“In fact, the percentage of loss making downstream industries have generally tracked lower for this time last year.

“Metal smelters in particular are seeing the benefit of higher realised prices. Even further downstream sectors such as China’s automobile industry are also seeing financial conditions improve,” he adds.

As a result of increased output and improved financial conditions, Dhar suggests “that China’s commodity demand still has legs to run”.

He says this view is further bolstered by recent uplift in Chinese commodity import volumes.

“The exit of loss-making upstream production also explains why China is importing more commodities – China is simply replacing high-cost domestic production with low-cost imports,” he says.

“Importantly, this negates the view that weak upstream output will translate into weak downstream production, giving more credence to the idea that Chinese demand will remain supported until year-end at least.”

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